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On Rescissions in Executive Stock Options

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  • Rangarajan K. Sundaram

    (Stern School of Business, New York University)

Abstract

In recents years, some executives have been permitted by firms to rescind stock option exercise decisions by returning the stock to the company for a refund of the exercise price. Such rescissions have been widely condemned as weakening incentives. We find that rescissions often deliver the same incentive payoffs as a standard option but at a lower cost. The cost savings arise as a consequence of the tax treatment of the exercise/rescission decisions under U.S. tax law. The savings are associated positively with stock volatility and the personal/corporate tax rate spread and negatively with interest rates.

Suggested Citation

  • Rangarajan K. Sundaram, 2005. "On Rescissions in Executive Stock Options," The Journal of Business, University of Chicago Press, vol. 78(5), pages 1809-1836, September.
    • Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:5:p:1809-1836
    DOI: 10.1086/431443
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    Cited by:

    1. Guoyu Lin & Chenyong Liu & Jehu Mette & Rohan Crichton, 2022. "The Effect of Option Grants on Managerial Risk Taking: A Review," Risks, MDPI, vol. 10(8), pages 1-8, July.
    2. Wolfgang Bessler & Christoph Becker & Daniil Wagner, 2009. "The Design and Success of Stock Options Plans for New Economy Firms in Germany," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 12(4), pages 1-34, Spring.
    3. Heron, Randall A. & Lie, Erik, 2007. "Does backdating explain the stock price pattern around executive stock option grants?," Journal of Financial Economics, Elsevier, vol. 83(2), pages 271-295, February.
    4. Ju, Nengjiu & Leland, Hayne & Senbet, Lemma W., 2014. "Options, option repricing in managerial compensation: Their effects on corporate investment risk," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 628-643.

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